The Canadian marijuana stocks we’ve weeded out could run into some issues meeting their F2020E revenue targets
SmallCapPower | September 27, 2019: Revenue targets for major Canadian licensed producers could be too high according to CIBC Analyst John Zamparo. In a note to clients, released on September 24, 2019, Zamparo stated that the consensus revenue and EBITDA forecast from analysts are unachievable. Canadian cannabis companies have seen a stark decline in share prices since March, with the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) down 45% to $13.05, from its most recent high of $23.65 on March 19, 2019. Sliding valuations are attributed primarily to three main issues. First, weak retail store rollouts, particularly in Canada’s two biggest provinces by population: Ontario and Quebec. Second, poor black market to legal conversion, with some analysts estimating that the black market still controls ~70% to ~80% of industry sales. Third, the recent vaping epidemic with some jurisdictions banning vape products entirely. Zamparo is expecting Canadian cannabis revenues to top out at about $2.2B in 2020, growing to $3.3B in 2021. This is below the $6.5B consensus revenue estimate for 2020 and the $7.5B estimate for 2021. Today we have identified four Canadian marijuana stocks that may not meet F2020E revenue projections and we have included some possible reasons why.
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Figure 1: Consensus Cannabis Revenue and EBITDA Far Too Aggressive?
Source: CIBC World Markets, Capital IQ
*Share price data as at September 25, 2019, data obtained from S&P Capital IQ
Canopy Growth Corporation (TSX:WEED) – $32.69
Cannabis
Canopy Growth is the largest cannabis company listed by market cap on the TSX and NYSE. The consensus estimate for Canopy’s FY2020 revenue is $620M. The Company reported $90.5M in revenue during Q1/20, a 4% decline from the previous quarter. Canopy Growth would have to grow its revenue by 37% per quarter, over the next three quarters, to meet the revenue target. This will be difficult for Canopy to achieve, as it has been losing market to Aurora Cannabis (link to article). Canopy Growth has also invested heavily in cannabis beverages and it is unclear whether beverages will take off. As well, Canopy has had problems with its oils and capsules ($8.0M in oils and capsules were returned in the Company’s last quarter).
- Market Cap: $11,371.7M
- 90-Day Return: -39.5%
- YTD-Return: -12.6%
- 90-Day Average Trading Volume: 1,853,340
- FY2020 Revenue Estimate: $620M
- Fiscal Year end: March 31
- Revenues last reported quarter (Q1/20): $90.5M
- Quarterly Revenue Growth required to meet revenue target: 37%
The Green Organic Dutchman Holdings Ltd. (TSX:TGOD) – $2.40
Cannabis
The Green Organic Dutchman Holdings is a Canada-based cannabis producer with operations spanning from Ontario to Quebec. TGOD has already received the ACMPR cultivation and sales license but its two facilities are currently under construction. The combined production capacity of the two fully-funded facilities totals 1,643,600 sq. ft. and is expected to yield 219,000 kg of cannabis flower annually. The consensus estimate for TGOD’s F2020E revenue is $210M and the Company would have to grow its revenue by 83% per quarter, for the next six quarters, to meet this estimate. This might be hard for TGOD to achieve, as they are behind in cultivation, compared with many other major LPs, and are just beginning to ramp-up production, with its facility expected to be growing by Q4/19. As such, first material revenues are not expected to come in until F2020, putting a further damper on TGOD’s ability to meet its revenue target. Additionally, it is not clear how the demand for organically-grown cannabis will turnout, as the product is priced at the high-end of the range, with Unite Organic currently selling for $52.45 for 3.5 grams through the Ontario Cannabis Store website.
- Market Cap: $661.2M
- 90-Day Return: -28.2%
- YTD-Return: -5.7%
- 90-Day Average Trading Volume: 1,677,980
- FY2020 Revenue Estimate: $210M
- Fiscal Year end: December 31
- Revenues last reported quarter (Q2/19): $2.9M
- Quarterly Revenue Growth required to meet revenue target: 83%
HEXO Corp. (TSX:HEXO) – $5.48
Cannabis
HEXO is a consumer-packaged goods and cannabis experience company. It currently operates 2.4M sq.ft of facilities in Ontario and Quebec. The Company utilizes a hub-and-spoke business strategy that involves partnerships with Fortune 500 companies. Through this strategy, HEXO brings its brand value, cannabinoid isolation technology, licensed infrastructure and regulatory capability to established companies, leveraging its distribution networks and capacity. On June 12, 2019, HEXO reported Q3/19 financial results, which showed revenue of $13.0M (net of excise taxes), a QoQ decrease of 1.5%. Analyst consensus estimate for F2020E revenue for HEXO is $505M. The Company would have to grow revenue by 80% per quarter, for the next five quarters, to meet this target. HEXO could face some headwinds in achieving this target. This is because HEXO’s revenues are derived primarily from Quebec and, as of June 2019, Quebec had to lowest amount of retail stores at 15, the lowest of any major Canadian province. Additionally, the Quebec government has limited the sale of derivatives and edible products, with the sale of candies, confections and desserts (including chocolate) banned. Edibles are expected to drive much of the revenue growth for Cannabis 2.0 and this ban could limit HEXO’s growth opportunity.
- Market Cap: $1,408.3M
- 90-Day Return: -22.3%
- YTD-Return: +15.3%
- 90-Day Average Trading Volume: 1,629,280
- FY2020 Revenue Estimate: $505M
- Fiscal Year end: July 31
- Revenues last reported quarter (Q3/19): $13.0M
- Quarterly Revenue Growth required to meet revenue target: 80%
Aphria Inc. (TSX:APHA) – $7.34
Cannabis
Aphria produces and sells medical and recreational cannabis-derived extracts in Canada. The Company currently has a 1.1M sq. ft Leamington greenhouse facility, called Aphria ONE, that yields 100,000 kg per year. Additionally, the Company has a premium cannabis brand named Broken Coast, produced in a 4,500 sq. ft facility in British Colombia that yields ~7,000 kg annually. The consensus estimate for Aphria’s F2020 revenue is $605M, however this includes revenue from its German Pharmaceutical distribution business, which has historically been about ~$290M. Removing revenue from CC Pharma, Aphria would need to generate cannabis revenue of $375M in F2020E, and it would have to grow its revenue by 54% per quarter, for the next four quarters, to meet this target. There are a couple reasons that could hinder Aphria from achieving $375M in cannabis revenue. First, the Company has been having operational issues; its Double Diamond facility has been waiting on its Health Canada Cultivation license since January 2018. Once approved, the facility would need two full crop rotations before being awarded its sales license, further delaying revenue from cannabis grown at the facility for an additional six months. Second, the Company’s Extraction Center of Excellence (ECoC) has also been delayed, as it is a part of the Double Diamond facility and it requires approval of Double Diamond before the Company can apply for a processing license at that facility. With limited extraction capabilities, the Company may not be ready for the legalization of edibles and derivative products expected in December.
- Market Cap: $1,849.3M
- 90-Day Return: -21.3%
- YTD-Return: -6.5%
- 90-Day Average Trading Volume: 1,954,620
- FY2020 Revenue Estimate: $605M (including CC Pharma) $375M (Cannabis Revenue Estimate)
- Fiscal Year end: May 31
- Revenues last reported quarter (Q3/19): $28.6M
- Quarterly Revenue Growth required to meet revenue target: 54%
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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